VEQT:CC - 2 Top Trends to Invest $6500 in Right Now
2023-08-23 11:30:00 ET
A warning before we dive into today’s article: I don’t really like chasing the latest investment trend. Why? Well, it’s fraught with cognitive pitfalls:
Herding : This is the tendency for individuals to follow the majority’s actions or beliefs, even if it contradicts their information or analysis. Example: Investing in a certain stock just because everyone else is, even when its fundamentals are weak.
Hot Hand Fallacy : The mistaken belief that a streak (either of success or failure) will continue more than it statistically should. Example: Believing a stock that’s gone up for five days straight will continue to rise.
Bandwagon Effect : When the popularity or adoption of a particular trend influences an individual to follow and adopt it, too. Example: Buying into the latest “buzzworthy” tech stock simply because it’s making headlines.
It’s worth noting, quite bluntly, more inherent risks in trend-chasing: the possibility that you might be mistaken about the existence of a trend, recognizing it too late after its peak, or the realization that perhaps it’s already a well-known phenomenon, with its potential returns already factored into its price.
Now, with those cautionary notes in mind, I’d like to share two trends — one short term and one long term — that I personally believe in and would invest a $6,500 Tax-Free Savings Account (TFSA) contribution in.
Short term: High-interest savings ETFs
Recent economic changes, particularly the spate of interest rate hikes, have brought a rather unconventional investment vehicle to the limelight: Exchange-traded funds (ETFs) that invest in high-interest savings accounts (HISA).
Traditionally, HISAs were reserved for individuals looking to park their cash in a relatively safe and liquid account. However, with the recent uptick in interest rates, ETFs focusing on these accounts have become increasingly attractive.
These ETFs now offer yields that are north of 5%. Not only is this return rate enticing, but there are also the benefits of low risk and minimal volatility — typical characteristics of savings accounts.
What makes this even more compelling is the payment structure. These ETFs generally pay out monthly, providing investors with a predictable stream of income. They’re also very liquid and easy to buy and sell.
For individuals, particularly those with a short investment horizon like saving for a downpayment on a house or another significant near-term expense, chasing this trend can make a lot of sense.
A great example is Purpose High Interest Savings ETF ( TSX:PSA ), which pays a net (after fees) yield of 5.31% as of July 13 and charges a 0.17% expense ratio.
Long term: Global equity ETFs
When it comes to betting on a long-term trend, my conviction lies singularly in the upward trajectory of the world’s total stock market. In essence, I’m talking about every investable country, every sector, and every stock.
By taking this diversified approach to investing, I mitigate the inherent risks associated with placing all bets on a single sector or country.
Economies, sectors, and individual companies go through their cycles of boom and bust. A country may face political turmoil; an industry might undergo regulatory challenges; or technological shifts might render certain businesses obsolete.
While some might argue that this approach might lead to merely “average” returns, there’s a certain beauty in this average.
Over time, the global stock market has demonstrated a tendency to rise, and achieving the market average is a commendable feat. This average, when compounded over long periods and bolstered by consistent investments, can lead to substantial growth.
In essence, this strategy is akin to embracing the tortoise’s wisdom over the hare’s: it’s not about the speed; it’s consistent progress that counts. The average return paired with the steadiness of broad diversification offers a reliable path towards long-term wealth creation.
To invest in this trend, consider an ETF like Vanguard All-Equity ETF ( TSX:VEQT ) , which holds over 12,000 global stocks for a 0.24% expense ratio.
The post 2 Top Trends to Invest $6,500 in Right Now appeared first on The Motley Fool Canada .
Fool contributor Tony Dong has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy .
2023